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DOL Fiduciary Rule: A Simple Solution

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Even if you are living on Mars, I don’t believe that you could have escaped exposure to the avalanche of negative responses to the Department of Labor’s new rules for IRA advisors. My email box is flooded with comments and articles, as are all the advisory industry websites and publications.

A few of these comments are thoughtful and well-reasoned: such as those of Knut Rostad, of the Institute for the Fiduciary Standard, who told me in a phone conversation that he was concerned about the “reasonable compensation” clause in the BICE section, which seems to suggest that brokers might be able to charge any commission they want to, as long as they all charge the same amount. 

Other comments, not so much. Some offer dire predictions for capitalism, the economy, and the American way of life. Others are more industry specific: For instance, Financial Guy’s comment posted to my April 6 blog (DOL Seems to Soften Fiduciary Rule Without Selling Out Investors) which suggested the DOL Rule: “…is nothing but Obamacare for the financial industry, ‘ObamaRetire’, a step away from ‘one retirement plan solution’ for retirement plans.” And: “…the real winner was never the investor, it was to be the ABA who will now be paid from industry instead of clients to cheap to hire them and the lawyers can initiate class action suits…”  

And then there’s “Commenter’s” comment to Melanie Waddell’s April 11 story, DOL Fiduciary Rule: The Good, the Bad and the Ugly.” The singular problem with this rule is that it is slanted 100% toward the consumer. It exposes the advisor to maximal legal risk, offers her no safe harbor protections and works to undermine any earnings she may make. Acting in a client’s “best Interest”, under this rule means nothing at the time of the transaction because the agent will always be judged after the fact – and usually by some consumer whose investment went wrong somehow. It effectively says to the advisor – be perfect and you will never face a lawsuit. Why would the DOL do this you ask? Because they have written extensively on how they view not just conflicted advice but all advice to be unnecessary. This rule was created not with the intent to clean up the advisory industry, but to kill it.” 

What’s curious to me about the seeming majority of these criticisms is that their writers seem oblivious to the fact that an entire industry of registered investment advisors have operated under the same, if not more stringent, consumer protection rules since 1940, and have been thriving.

Thriving so much, in fact, that back in the late 1990, virtually every brokerage firm in the country opened their own RIAs to allow their brokers to manage client assets under them—and the ’40 Act. And capitalism didn’t collapse. 

To my mind, the current DOL situation is real simple. Back in 1940, Congress determined that the 1929 stock market crash was, in part, caused by investors being unclear about the services that their brokers were providing. So they passed the Investment Adviser Act of 1940, which created a fiduciary standard for folks who provided investment advice. But the brokerage industry wasn’t happy about being relegated to “securities sales,” and lobbied hard for the “broker exemption” to the ’40 Act, which allowed brokers to offer investment advice, as long as it is “usual and incidental to the sale of securities.”

Fast forward to early 1970s, when the “Go-Go” stock market of the ‘60s, which had almost every stock broker in American “helping” almost every adult from school teachers to auto mechanics to get in on the action. When the market crashed in 1968, and a lot of folks lost a lot of money—mostly retirement money—people began to question the “broker exemption, “ and the Employment Retirement Income Security Act (ERISA) was passed into law in 1974. ERISA essentially eliminated the “broker exemption” for all advisors offering advice on retirement investments. Which meant the brokers were cut out of this lucrative industry. 

With one exception. ERISA also created “Individual Retirement Accounts” (IRAs), for people not covered by traditional retirement programs or 401(k)s. However, that law failed to protect investment funds that were “rolled” out of 401(k)s to be invested in IRAs. Which meant that brokers could still utilize their “broker exemption” from being adviser fiduciaries when “advising” retirement investors on rolling over their savings into IRAs.

And a large portion of the securities industry grew to exploit, I mean, fill this need. 

So let’s be clear: providing advice on IRA rollovers without being required to act in investors’ best interests is not a foundation of capitalism, a traditional part of the brokerage business or even a God-given right. It’s a mistake in the law. Period. 

And the DOL’s current rule-making is simply an attempt to correct this mistake and close the loophole. With the benefit of hindsight, many folks believe that the broker exemption to the ’40 Act, which allows brokers to give investment advice without acting in their clients’ best interest—is at least outdated and was also probably a mistake from the get-go: because it allows brokers to give financial “advice,” but call it “sales.” 

So, the solution is simple: brokers who want to give advice should be considered advisers. And brokers who want to simply sell should be considered salespeople. Both are fine professions: but they are completely different services, with different sets of responsibilities.

And as far as I can tell, with its new rules, that’s all the DOL is saying.

See ThinkAdvisor’s complete coverage of the DOL fiduciary rule.


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